How Hospitals Turn Community Care And Taxpayer Subsidies Into Capital

The future of healthcare has taken center stage in Congress and across the country. Hospitals play a pivotal role in healthcare and our communities. In addition to caring for patients in a diverse array of services, they are often massive employers, providing good jobs and high-paying wages for trained staff. However, many hospitals enjoy a full exemption from federal income tax, obtaining the same status as 501(c)3 nonprofits. It’s hard to explain why; “nonprofit” hospitals are making vast amounts of money. In fact, of the 10 most profitable hospitals in America, seven are technically nonprofit.

To keep their tax-exempt status, hospitals need to meet purposefully vague criteria, the most critical of which is the community benefits standard. This standard requires tax-exempt hospitals to provide a “benefit” to the communities they serve, but it gives hospital administrators enormous leeway to define what that means and to decide the scope of their giving internally.

As a result, numerous hospitals and care systems have provided little tangible benefit to their respective communities. There is no standard to this care, meaning that the amount of reported investment in community care varies dramatically from hospital to hospital. Recent investigations have found that some hospitals have provided no discernable benefit to their constituents – even though they’re generating enormous profits and enriching themselves.

Having no legal standard allows each hospital to decide how it will provide care to their communities. Some hospitals provide discounted services to patients living at three times the federal poverty line (FPL), while other hospitals provide discounted care to people living at the FPL. It is unclear how these decisions are made. Is one group more “needy” than the other? Is one hospital more generous? Tax-exempt hospitals can essentially determine the answers to these questions for themselves – and they continually find answers that equal greater profits.

Because of the lack of oversight in interpreting the “benefit” clause, hospitals have no incentive to improve care or community health but every incentive to increase stakeholder and CEO profits. Last year, Morristown Medical Center in New Jersey almost lost its tax-exempt status after paying its CEO a $5 million salary. The judge ruled that the hospital should pay taxes because its revenues and executive pay was competitive with for-profit hospitals.

In a similar example of abuse, nonprofit hospitals in New York State continued to pay millions in bonuses to hospital executives even after the Affordable Care Act (ACA) attempted to lower healthcare spending. New York law doesn’t allow for-profit hospitals, but its nonprofit hospitals—with first-class travel and country club memberships—sure act like for-profit hospitals.

Examples of nonprofit hospitals being exposed for financial malfeasance are becoming more widespread. The public is starting to question why organizations that operate in much the same manner as their for-profit counterparts are allowed a special tax exemption without providing the promised tangible benefits.

Put simply, our healthcare sector needs free market solutions, not winners crowned by Washington. Laws should not be written to enrich any particular industry, and taxpayer dollars should not subsidize profitable hospitals.

While the way forward for healthcare reform may be uncertain, it is certain that the system needs dramatic reform. It is time to take a hard look at our nation’s nonprofit hospitals. Lawmakers may be reticent to turn a critical eye on such large employers, but these facilities are taking advantage of taxpayer dollars without providing the promised community care.

It is right to demand that institutions that enjoy favorable government treatment are held accountable to high standards. Nonprofit hospitals should be no different, and the question should be asked why they receive preferential treatment.

David Williams is the President of the Taxpayers Protection Alliance, a non-profit, non-partisan organization dedicated to educating the public through the research, analysis and dissemination of information on the government’s effects on the economy. In his 18 years in Washington, D.C., David has become an expert in finding and exposing government waste and has helped fine tune criteria in identifying and ultimately eliminating earmarks.